How To Know If You Should (Or Can) Consolidate Your Federal Student Loans

How To Know If You Should (Or Can) Consolidate Your Federal Student Loans

You can often consolidate your federal student loans. Whether it’s a good idea, however, is a different matter entirely.

I’m a big fan of keeping my finances simple.

The more bills I get each month, the more likely it is that something’s going to fall through the cracks.

That’s why I like to pay my utility bills automatically through my checking account, and why I opt for paperless billing whenever possible.

When it comes to consolidating your federal student loans, however, the decision isn’t always so simple.

Can You Consolidate Your Federal Student Loans?

Though most federal student loans can be consolidated under the Direct Loan program (which is administered through the U.S. Department of Education), there are exceptions to the rule.

Some Loans Can’t Be Consolidated. You can’t consolidate private education loans with your federal loans. You also can’t consolidate a PLUS loan originally made to the parent of a dependent student.

Default May Be An Issue. In order to consolidate, you’ve got to have at least one Direct Loan or FFEL Program loan that is in a grace period or in repayment. If one of your loans is in default then you’ve got to either cure the default before consolidating or agree to repay the new Direct Consolidation Loan under either the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, or the Income-Contingent Repayment Plan.

You Can Consolidate Only Once. Consolidation is usually a one-time process; you can’t ordinarily consolidate a loan that’s already gone through the system as you would with refinancing a mortgage or a car loan.

You can, however, consolidate an existing consolidation loan again by adding in an additional Direct Loan or FFEL Program loan in the consolidation.

For this reason I’ve heard of people going back to school for a semester and taking out a new Direct Loan for a single class so they could reconsolidate. That just doesn’t sound like a wise financial move – adding in debt simply so you can consolidate again. If you’re thinking about doing this, you may want to give me a buzz first so I can show you just how bad of an idea this is.

Is Consolidation A Good Idea?

Let’s say you can consolidate – now you need to figure out whether it’s a good idea for you.

Just because you can do something, after all, doesn’t necessarily mean you should.

In order to make your decision, consider these issues:

Your Interest Rate May Change. The interest rate on a Direct Consolidation Loan is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. If you’ve got one loan with an outrageously high rate, that’s going to bring up the average.

You May Enter Repayment Faster. Repayment on your new consolidated loan will begin within 60 days of the date of consolidation. If you’re currently in deferment or forbearance, that could hit you in pocket pretty quickly.

Your Payments May Rise. Remember that your interest rate will change once you consolidate; that means your payments may actually go up rather than down. Estimate your weighted average interest rate to determine your loan payments after consolidation.

The Federal Loans May Not Be Your Problem. If your private student loans or other debts are the ones dragging you down, then consolidating won’t really solve the problems. Take a look at the rest of your financial situation to make the smart move.

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.